Germany Champions Reforms While Industrial Model Faces Global Stress Test

May 17 , 2025.

Jens Hanefeld, Germany’s envoy in Addis Abeba, touched down last September with a resume that mixes three decades of diplomacy, a decade running Volkswagen’s global lobbying shop and the trained eye of a historian. Serving as ambassador to Ethiopia and Berlin’s permanent representative to the African Union (AU), he oversees a diplomatic mission marking 120 years of formal ties with Ethiopia while setting foot in Africa for the first time.

In an interview with Tamrat G. Giorgis, managing editor, the Ambassador dismissed talks that Europe’s export powerhouse is in permanent decline. Inflation, he noted, has eased to 2.1pc, even if growth is flat. He believes the new government under Chancellor Friedrich Merz’s coalition has room to kick-start the economy by trimming the civil service by eight percent and unleashing "the Mittelstand,” the small, specialised firms he credits for Germany’s engineering edge. Deregulation, not dirigisme, will restore Germany’s lead in the European Union, despite the looming 2035 ban on combustion engines and a shortage of battery metals.

In Ethiopia, the Ambassador struck a warmer tone. He praised the government’s “home-grown” reforms, from a new foreign-currency regime that lets investors repatriate dividends to broader macro fixes the IMF has welcomed. He sees big promise in green energy, pointing to hydropower that could feed a global appetite for clean hydrogen. He called the long waits for Ethiopian visa applicants to Europe a temporary European Union tool, improving cooperation on returning migrants. Development aid, re-routed during the northern war, is still flowing, he said, cushioning the pain of reforms and shoring up the Pretoria peace deal.

The envoy often reaches back to history. He recalled that Germany merged NATO and Warsaw Pact forces after 1990, proving that adversaries can forge a single army when compromise is genuine. He said Berlin prefers quiet persuasion to “megaphone diplomacy” on human rights, but it does expect progress on transitional justice, a freer press and credible elections. If, in two or three years, he can point to deeper German investment, steadier peace and Ethiopian children thriving at the 70-year-old German Embassy school, Ambassador Hanefeld will count his tour of duty a success.

Fortune: I understand that the new government faces two critical economic issues. One is the stagnation of the German economy and the rising cost of living, which many pundits attributed to the outdated model of German growth after the Second World War, where the economy is essentially based on exports. With many things changing since WWII and the ongoing geopolitical realignment in the world, where the liberal order has become more protectionist with the tariff war, do you believe that the new government, continuing with the old model, will be sustainable?

Ambassador Jens Hanefeld: You touched upon the complicated situation we currently face in the world, and this is indeed an issue that all economies must grapple with.  However, I have to beg to differ a little with your question. While Germany has indeed had a period of sluggish growth for the last three years, the rise in the cost of living is not that much of a problem at this point. We currently see an inflation rate of around 2.1pc, which is not overly alarming.

While the cost of living is naturally something to keep an eye on, I believe the bigger issue is economic growth.

We have a new government with a strong mandate for reform. Chancellor Friedrich Merz's statement this week outlined a very ambitious plan to address this, and I am optimistic that Germany will return to its traditional position as an economic powerhouse in Europe.

Q: Do you think Germany can look within instead of anchoring its economic model on outside markets?

Germany has always very much relied on skills for its economic model. We do not have many natural resources in the sense of raw materials. We are dependent on open trade and open borders — engaging with the world — while fundamentally depending on the skills and expertise of our people.

One of Germany’s particular economic strengths has always been its culture of small and medium enterprises (SMEs). These firms, sometimes known only within very specialised fields, often emerge as world leaders in their niches, particularly in machinery and, increasingly, new technologies.

What we now see, and what the new government has been adamant about, is a protracted policy of deregulation and cutting back on state intervention. Among the coalition’s commitments is an eight percent reduction in the public sector over the coming four years, a strong signal that the government intends to allow the private sector the necessary breathing space for innovation.

Q: Germany has generated close to one billion euros in business and investment for Ethiopia since 1964. But, German companies that have invested and are doing business in Ethiopia are no more than 30. Why is Germany not one of the major trading partners compared to newer arrivals like China or Turkey?

We should be careful when comparing across such a historical timeline. Ethiopia has undergone numerous political transitions, from monarchy to communist rule to its present system, each profoundly affecting the business climate.

Nonetheless, there is certainly room for improvement in foreign investment. Ethiopia has tremendous potential, particularly in green energy, where it can leverage abundant, CO-neutral power, something highly valued abroad and by Germany. Our task now is to work together to create a business environment that instils confidence in both foreign and domestic investors, ensuring they experience Ethiopia’s reforms as credible and sustainable.

Q: Last August, a major policy decision was made to liberalise the forex regime. Are you happy with the progress made since then?

The progress in macroeconomic reform – much more than liberalising the forex regime –  has been truly impressive. The term "homegrown economic reform" signals strong national ownership, and not something imposed from outside. From my conversations, there is widespread appreciation for the speed and commitment to these reforms. Of course, there is room for improvement, but maintaining the course is critical.

Through our development cooperation, we also seek to alleviate any hardships these reforms might impose on parts of the population, reinforcing social stability alongside economic adjustment.

Q: However, in practice, the forex market operates as a managed floated currency regime rather than the full liberalisation it has been promised.

From our perspective, the system has been liberalised. We see how most banks adjust the exchange rate according to demand and offer. The fact that foreign companies can now transfer dividends out of Ethiopia demonstrates that the mechanism is functioning. It was understood from the outset that it would not operate flawlessly overnight. Nevertheless, I am impressed by its performance and echo the IMF’s positive assessments.

Q: You consider Ethiopia a peace anchor in Africa, yet insurgency persists in regional states like Amhara and Oromia, and the Electoral Board dissolved the TPLF, casting doubt on stability. Could these developments prompt Germany to reconsider its views of Ethiopia’s status as a regional anchor?

Germany values national reconciliation and a peaceful political system that includes all stakeholders. We fully support the Pretoria Agreement and commend Ethiopia’s partners, including the African Union, for facilitating this peace framework.

Germany is committed to backing Ethiopia — politically and financially — through next year’s elections, ensuring broad representation and internal stability.

Q: Speaking of reconciliation, Germany suspended development aid after the 2020 civil war in the north and stayed until the Pretoria Agreement was signed. There’s a lot of talk about national dialogue but less about justice and accountability for crimes and atrocities committed during the war. Why the quiet on accountability?

Let me clarify that we did not stop our development cooperation after the outbreak of the war but we shifted our efforts to support the Ethiopian people directly. We believe in the importance of transitional justice and have consistently designated it as a key priority within our EU and bilateral support frameworks. Ultimately, Ethiopians must agree on and implement their own mechanisms for justice and reconciliation. We stand ready to support these efforts. The pace of transitional justice is a matter for domestic judgment, but from our view, there is room to accelerate processes without undermining local ownership.

Q: The EU’s “Jobs Compact” was designed to provide opportunities to reduce migration pressures. How do you see its effectiveness?

The Jobs Compact, which has come to an end, has largely achieved its initial goals, particularly in responding to the COVID crisis. We are cooperating closely with Ethiopian authorities on the longer-term migration management.

Germany believes in qualified, regulated migration rather than unregulated flows., we are designing frameworks that offer clear and legal pathways for skilled workers. Public sentiment around migration is highly charged, but by focusing on skills and legal channels, we plan to address both economic needs and societal concerns.

Q: The EU recently imposed a 45-day delay on visas from Ethiopia to Schengen states due to unsatisfactory cooperation on returns. There is a widely held public misgiving over this issue.

This is a European issue, not a bilateral one, but I can explain the facts. The extended visa processing time – not an impediment to travel – reflects challenges in the return process for Ethiopians residing irregularly in Europe. Ethiopian authorities are taking steps to improve cooperation, and we are monitoring progress to ensure the measures remain temporary.

We address this in the spirit of partnership, ensuring it does not become a lasting impediment to EU–Ethiopia relations.

Q: However, public opinion in Ethiopia views the visa delay as unfair, affecting many individuals unrelated to the issue.

It is important to note that the delay does not reduce the number of visas issued; it only extends the processing time to 45 days. While I understand the inconvenience, we are seeing constructive steps from Ethiopian counterparts, and I expect the situation to normalise.

I believe clear communication about the temporary nature of this measure is essential to allay public concerns.

Q: Germany champions a global green hydrogen economy, while Ethiopia anchors its industrial strategy on hydropower (GERD). Where does Germany’s strategic support lie between small-scale renewables and large hydro projects?

Germany’s primary commitment is to reduce CO under the Paris Agreement. Hydrogen became a strategic focus after Russia weaponised energy supplies with its war of aggression against Ukraine. Ethiopia’s hydropower success is remarkable because the green electricity share here is among the highest globally.

We support all renewable energy projects that reduce carbon emissions, respecting each country’s sovereign choices while encouraging best practices.

Q: Does Germany’s domestic energy policy dictate support for similar projects abroad?

Ultimately, each country makes its own energy decisions. Germany advocates global climate commitments and encourages partners to meet their CO targets. We provide technical and financial assistance where it aligns with these shared goals.

Our role is to facilitate, not prescribe, respecting national sovereignty while promoting international cooperation.

Q: The EU has mandated the end of combustion engines by 2035. Germany’s automotive industry, long dependent on engineering expertise, seems less aggressive than China or the US in EV adoption. Why?

The situation is complex. For probably a century, the German automotive industry has relied primarily on its engineering expertise in the construction of combustion engines. The shift towards emission-free mobility is obviously a challenge for a country that lacks raw materials.

We have to bear in mind that the normal engine in a combustion engine vehicle, for example, consists of up to 4,500 parts. This is quite an engineering feat. The engine in an electric vehicle consists of less than 400 parts in most cases, and the value-added component of the battery makes up a far higher share in an electric vehicle than raw materials do in a combustion engine vehicle.

For a country with few raw materials and an engineering-based industry like Germany, transitioning to a propulsion technology, which essentially needs a high volume of raw materials sourced elsewhere, including all the necessary transitions to the business model, presents a challenge.

I would not say that we see a crisis or anything but a transition, which is fundamental to a key industry in Germany. But at the same time, it is not as if the German industry is failing in this field, quite on the contrary. I am convinced that the German car industry will continue playing a very strong role in our industrial base.

Undoubtedly, it took the German car industry a while to adapt to this. They have a proven business model that is still very successful worldwide. At the same time, German carmakers, while perhaps a little hesitant initially in adopting new technologies, have now wholeheartedly embraced them and are increasingly becoming world leaders in this field as well.

Q: Will Germany meet the 2035 deadline?

The 2035 combustion-engine ban is EU law. Member states must comply, and I am unaware of any plans to amend it. If adjustments become necessary, they will be debated within the EU framework. For now, all signs point to Germany meeting its legal commitments.

Q: Considering Germany's historically high national saving rates, which encourage domestic banks to channel household savings into foreign investments, can Germany restructure its financial sector to stimulate domestic innovation and entrepreneurship instead?

I think Germany has something like a 10pc savings rate. This puts us a lot higher than other countries, but we are not the highest. I think the savings rate is a stabilising factor in many ways, including domestic spending and expenditures, as well as the credit rating of the country as a whole.

The new government has made it clear that it intends to ensure regulations, which will incentivise increased investment by private investors. Given the financial requirements, we will also have to carefully follow what will happen to the international bond markets.

I have been working in both the public sector and in industry for a number of decades. The question of whether Germany's share of industrial production is an asset or a liability has been hotly debated and remains controversially discussed numerous times. There was a time when people believed it was an old economy. Then there was a time when people said, “Oh, thank God they have that because you still have the jobs.”

We have seen a back-and-forth discussion on the respective advantages and benefits of being a service, digital, or the more traditional concept of industry. At the end of the day, you need to find a balance that reflects your national interest.

One of the things which we have definitely discovered, and I think we're not the only ones, is that a more traditional industrial base tends to provide very well-paying jobs. There is a strong interest everywhere in the world at this point in time to maintain this kind of employment, and I think Germany is well positioned for that.

Q: Given the debate on Germany’s industrial base (old economy) versus services and digital sectors, are you comfortable with the traditional manufacturing-led model?

Germany’s model, rebuilt after World War II, has proven its resilience and adaptability, often quietly led by family-owned SMEs. This model delivers high-quality jobs and sustained competitiveness. While the service and digital sectors are growing, industry remains a cornerstone. A balanced economy that preserves strong manufacturing while embracing innovation reflects our national interest.

Q: You’ve drawn parallels between Germany’s reunification and Ethiopia’s ongoing national reconciliation processes. Given your firsthand experience of German reunification, what specific, actionable lessons on reconciliation, trust-building, and security-force integration can Ethiopia realistically adopt from Germany's model, particularly in light of Ethiopia’s ongoing difficulties in building a cohesive national army?

I think you are referring to my speech on our national day shortly after arriving in Ethiopia. I made two points in that speech.

One is indeed the need for national reconciliation. Germany, as a once divided country - which after all was on two sides during the Cold War - has learned quite a bit about national reconciliation and bringing people together, who have sometimes had very different experiences.

The concrete example is the fact that we are having the anniversary of the creation of the German armed forces this year. The German armed forces are a case in point because they integrated an army of the Warsaw Pact (the National People's Army of East Germany) and that of NATO (the Bundeswehr of West Germany) into one new united force.

National reconciliation is never easy; it is hard. You have to work for it, commit to it, and compromise. It will never work without these. Germany’s experience showed genuine reconciliation requires commitment, compromise, and inclusive institutions.

Q: Could Germany ever impose preconditions (such as issues of human rights, press freedom, and democratic governance) for its engagement with Ethiopia?

Our relationship with Ethiopia is built on open dialogue and mutual respect, not unilateral preconditions. We address sensitive issues through diplomatic channels, encouraging constructive solutions rather than public ultimatums. Maintaining trust and partnership is more effective than imposing rigid external demands. Also, almost all of our humanitarian and development support directly benefits the people of Ethiopia.

Q: How much leverage do you believe Germany has in shaping Ethiopian policy decisions?

Ethiopia is a proud, independent nation with its own history and vision. Our influence is exercised through partnership and shared interests, not imposition. Diplomacy is about balancing respect for sovereignty with advocacy for common goals.

True leverage comes from demonstrating value as a reliable partner in areas like development cooperation, trade, and investment.

Q: To the time that you have spent here, what keeps you up at night about Ethiopia?

To be honest, nothing keeps me awake. All the interlocutors I have met are deeply committed to Ethiopia’s future. My hope is that Ethiopia continues to play a constructive role internationally at a time when the rules-based order faces challenges. Ensuring peace, stability, and a thriving economy will allow Ethiopia’s voice to be heard as a force for good.

Q: Are you not worried that Ethiopia is not yet able to resolve its violent conflicts?

I see many dedicated people working earnestly on reconciliation and peacebuilding. Conflict resolution is never easy, but commitment and dialogue are key.

Ethiopia’s geopolitical role, hosting refugees and combating terrorism, demonstrates its constructive engagement. Staying the course on reconciliation and inclusive governance remains the only viable path forward.

Q: It has been close to one year since you arrived here. How would you like to define your time serving in Ethiopia? Some ambassadors are more political, some more economic, and others focus on cultural affairs.

As a German diplomat, I am a civil servant, a career officer, and not a political appointee. I see my role essentially as serving the bilateral relationship between Germany and Ethiopia.

I try to support in whatever field is necessary, whether economic, cultural, or political. I do not see myself as the figurehead of change, but rather as an enabler, someone who provides support and sometimes guidance in the background. That, in essence, is how I would define my role in this post, a facilitator of cooperation who helps strengthen the longstanding ties between our two countries.

Q: How would you like to look back and understand your accomplishments after two or three years during your exit? What particular things would you like to have achieved?

I would be happy if the bilateral relationship between Germany and Ethiopia continued to thrive. We have a longstanding economic partnership, and there is room for improvement, particularly in stimulating foreign investment. I hope we will have proceeded further on Ethiopia’s path toward economic reform, building on the important steps taken last summer. I want to look back then on a flourishing cooperation in the field of culture and education; just to mention that the German Embassy school, where many Ethiopian children receive excellent education, is turning 70 this year.

One of the most significant achievements I would point to is national reconciliation and peace, which provide the groundwork for a prosperous future aligned with ongoing reforms. I also hope to see progress in the rule of law, transitional justice, and freedom of the press, issues that are crucial for sustainable development and international confidence.

PUBLISHED ON May 17,2025 [ VOL 26 , NO 1307]

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